Bank Stocks: Solid Value or Substantial Risk?

If you are looking for good value in today’s market, you might be having a hard time. The market has rallied strong over the last several weeks and left many investors that were waiting for a retest of the March lows in the dust. There are some sectors in the market that have been beaten up the most since the crisis started, and that includes the financial sector.

With terrible economic data and signs of a recession, it will be interesting to see how banks perform going forward. Although there isn’t a lot of positivity in the banking industry at the moment, some investors are taking a page from Warren Buffett’s book and “being greedy when others are fearful”.

Let’s take a look at bank stocks below and consider whether or not they are a good value at this time.

Why Have Bank Stocks Dropped?

The coronavirus has been wreaking havoc on the global economy over the past several months. With most people encouraged to stay at home and skyrocketing unemployment, it’s safe to say that there are a lot of question marks about what’s going to happen with the economy at this point in time. This is essentially the main reason why the bank stocks have dropped so sharply since the global health crisis began. Banks are extremely important for the economy as a whole since it is their lending that tends to drive economic growth and allows businesses to expand their operations. It’s somewhat concerning that the big banks have not participated in the market rally off of the March lows.

The financial services sector has actually been the second-worst performing sector this year behind the energy sector. Bank stocks like Goldman Sachs NYSE: GS and JP Morgan Chase & Co. NYSE: JPM have certainly taken a hit, as investors are fearful of a lasting recession and large loan losses for the major financial players in the industry. If rising unemployment continues and small businesses are unable to survive, the banks will be forced to take massive losses. With that said, the uncertainty in the economy has depressed the values of these stocks and provided investors an opportunity to gain exposure to the industry at dirt cheap prices, if they have the stomach for the risk.

Are Bank Stocks Worth a Look?

Now that we have clarified why the bank stocks have been falling so sharply, it’s time to consider whether or not they are worth a look for your portfolio at current prices. One of the things you might consider a positive for bank stocks at the moment is their higher than usual dividend yields. Since the stock prices of these companies have taken such a large drop, the dividend yields for them are quite attractive. Companies like JPMorgan Chase & Co. NYSE: JPM and Citigroup Inc. NYSE: C currently have yields of over 4%, which is very appealing for dividend investors. However, there is a small risk that these companies will need to cut their dividend payments if things get worse for the economy.

Another plus for bank stocks is the potential for an economic rebound. One could argue that if the government and health officials are able to get things under control with the pandemic, the economy will come back strong. We have seen record stimulus coming from the Federal Reserve which will certainly help major banks and small businesses weather the economic storm. Keep in mind that the biggest beneficiaries of a sharp economic rebound would be bank stocks. It’s also worth noting that although many large investors like Warren Buffett are reducing their exposure to the industry, financial services companies still account for a massive portion of his portfolio.

Rebound on the Way?

Many investors still remember the 2008 financial crisis like yesterday, which is why you might be worried about how the banking industry will do during this period of economic uncertainty. With that in mind, many of these bank stocks have discounted valuations and strong dividend yields due to the huge price drop this year in the financial services industry. If you are willing to accept the near-term risk that comes with the financial sector, it can potentially pay off for you in a big way.